London Stock Exchange hopes to lead the world in scaling up

Bingo! The London Stock Exchange has come up with such an astonishingly brilliant – and simple – idea to help solve Britain’s age-old funding problem for scaling up companies that you wonder why it has never been done before. 

Not only has no exchange come up with this game-changing concept but the London market is the first in the world to launch what’s being called the Intermittent Trading Venue – or ITV for now. Companies and investors are hailing its innovation all over the globe and, in the best form of flattery, the New York exchanges are also said to be experimenting with a similar platform. 

So what’s all the fuss about? Well, the ITV is a hybrid between the private and public stock markets, a sort of private auction acting as a bridge between private companies and investors in the public markets. 

Put simply, it’s a trading platform which creates an auction between private companies, which have shares to sell and are in desperate need of liquidity, and investors on the other side of the bridge, who want access to the latest generation of small, high-growth companies. 

The reason why it’s such a brilliant concept is that ITV bridges the needs of two quite separate communities which have until now found it difficult to meet up within a protected, and regulated environment. But if the ITV works as it says on the tin, young companies should now have a place for the secondary trading of their shares in a public place. This means they won’t have to go through the rigmarole of a public listing – and all the disclosure that is required – but their shares can be matched through the auction with a pool of investors who want to invest in these kinds of high-growth companies which at present have difficulty in accessing them. 

This is how it will work. Company X will register with the new venue and decide how many times a year it wants to open up its books to new investors and the volume of shares to be sold.

 Three days before the auction, company X will allow investors to see their “data room” – latest relevant financial data  – in what amounts to a closed portal, and then trade a certain amount of shares that they may want to offload. 

For example, the sellers could be founders or shareholders who backed the company early on but now want to reduce their holding, or sell-out entirely. One of the problems faced by many small-sized companies is that often their original founder investors want to exit, putting pressure on the management to go for a trade-sale as their only means of an exit or to wait for an IPO, which for many young companies is either too arduous or too far away. This auction means they have an escape route. 

And it gives new investors a way in. The money-men with billions of pounds in their portfolios now have a much more transparent way to look at some of the UK’s most interesting and high-growth companies in a more visible way, and can now buy their shares. Or if they were to really like the company, they could even do a Victor Kiam,  the spokesman for the Remington shaver, who became famous with his saying: “I liked it so much, I bought the company”.

More details have yet to be thrashed out but it’s likely that venture capitalists and asset managers will register with the big investment banks which will become registered auction agents.

What’s for sure is that ITV is causing quite a stir. It’s not often that you hear entrepreneurs, CEOs or indeed venture capitalists and other asset managers raving about a new move from the London exchange but this one seems to have set pulses racing.

If the grown-ups posting on LinkedIn is anything to go by, it’s going to be the best thing since sliced bread. One young CEO in the biotech field tells me the new ITV is “genius thinking” from the LSE and everyone he speaks to is also singing its praises. They can’t wait for the market to start operating.  

Yet they will have to be patient a little longer. Darko Hajdukovic, head of new primary markets, says the auction should be up and running next year, certainly by the end of the year as there are regulatory changes which need to be sorted out first. 

He adds that the exchange has been inundated with interest from companies – particularly the scale-up tech firms that many fear are fleeing the UK to find capital – and investors all around the world who see the potential of bringing together private companies within the mechanism of the public markets for the first time. As Hajdukovic explains, the exchange came to its innovative auction bridge because it wanted to find answers to several problems faced by smaller companies:  “We wanted to solve the problem of fragmented liquidity, the lack of transparency and the uncertainty in terms of execution, and uncertainty in terms of timing of execution for smaller companies.”

To find out what was not working well, he adds, he and others at the exchange have spoken to hundreds of private companies to find out the true nature of their problems, and how to help them scale-up and find fresh liquidity without the onerous requirements of listing and the daily grind on being in the public spotlight. “Infrequent is the key word: this market will serve companies whose investors neither need, nor have the desire for ongoing liquidity,” he says.

Scaling up is one of the biggest problems facing the UK’s smaller companies which are in that in-between stage of doing great things and finding a way to realise their ambition. Yet finding access to fresh liquidity – and indeed new capital – is essential for the health of the UK economy, particularly from domestic investors. If you don’t have investors on the ground, it’s harder to show those overseas funds that you have traction: that’s why it’s such a chicken and egg situation. 

Getting the funds for scaling-up is vital as these are the small number of companies that drive innovation, job creation and productivity.

 Hajdukovic cites research by the Scaleup Institute which shows that the 34,000 scale-ups in the UK contribute £1.2 trillion in turnover to the economy and employ three million people. By contrast, the six million other small and medium sized companies contribute another £1.1 trillion. That means that a tiny proportion of the SME sector – 0.6% – accounts for one third of the UK economy.

This latest venture from the LSE is part of its much broader campaign to improve public listing, and to ensure it remains competitive with flotations on other stock markets. 

Unless you have been on Planet Zog for the last few years, you would know that finding ways of making the public markets more attractive for companies to list has become something of an obsession with the authorities – not just in the UK. Improving regulation, making it easier for companies to list yet maintaining high standards are all part of Jeremy Hunt’s latest Mansion House proposals – building on the Edinburgh Reforms – to improve the competitiveness of London markets. 

Yet there are big structural changes and challenges that have to be met and which may have altered the landscape for some time to come. The growth of private equity – while interest rates were at rock bottom – and some of the penalties of being on a big public market have meant that many company bosses have stayed away from listing. Or they have moved from London to New York because of fancy valuations – or so they thought. 

The latest figures bear out the trend. Indeed, the IPO market has fallen off a cliff over the last year, partly because of volatile trading times after the lockdown and Russia’s war on Ukraine. Only 18 firms raised a total of £593m in the first half of this year according to EY’s latest IPO tracker – that’s about the same as last year but well below the record levels of 2021 when 47 floats in London raised £9.4bn in the first six months.

Will the IPO market pick up again? Who knows, but there is a growing awareness across public stock exchanges – not just here in the UK – that private markets have grown strongly over the last few years and that they are here to stay. 

What this new ITV venture does, therefore, says Hajdukovic is to fill the gap so that companies can operate in the private space but also in the public one simultaneously. But what may be curious perhaps to many is why would a public market operator such as the LSE be so interested in this reform? To many insiders and indeed the outside world, all the attention has been on the LSE as the mechanism by which companies list and therefore raise new capital, either primary or secondary. 

Yet if you go back in time, exchanges came about as conveners of capital: what the LSE is doing here is going back to its roots: bringing together those who want to grow, and those who want to invest. With luck and clickety-click, we can but hope the ITV will do the trick. But the venue needs a decent name. The London Bridge has a good ring to it. 

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